Political pickle may boost appetites

Commodity and global resource markets will be stung by the slowest Chinese growth for almost three years but there will not be a wild commodity sell-off.

But the poor Chinese growth numbers will add to the view that the great resources boom of the past decade is steadily coming to an end. And this means the Australian dollar will come under increasing pressure and the Australian economy will also increasingly struggle as the dynamism of the resources sector fades.

It was the slowest growth rate since the first quarter of 2009 and way below previous fourth-quarter 2011 growth of 8.9 per cent and year-ago growth of 9.7 per cent.

But slower Chinese growth will not trigger aggressive investor selling of commodities or resource equities.

Investors will be comforted by the fact that the poorer number raises the likelihood Chinese policymakers will loosen monetary policy to ensure growth does not slump further. Already, there are signs this is under way with March new bank lending in China at a year-high and money supply growing a lot faster than most anticipated.

As well, China’s industrial production growth and investment in fixed assets – both primary drivers of the nation’s resource-intensive growth and critical for sustaining its commodity demand – remained strong. March industrial production increased by a faster-than-expected 11.9 per cent while year-to-date investment in fixed assets, such as new factories, high-rise office and residential towers, roads, rail and bridges, grew at just below an expected and still strong 21 per cent.

Investors believe Chinese policymakers will be able to glide the economy, burdened as it is by inflation and speculative-driven property price rises, into a soft landing.

Related Quotes

Company Profile

But even that will only be able to slow what now appears to be an inevitable slide in commodity prices and resource equities. Already, commodities, measured by the widely followed Thomson Reuters/Jefferies CRB index of US commodity futures, have dropped all their early year gains, just as they did in 2011 and 2010.

The China story must be put in context. The slowdown must be seen against the collapse in demand for resources in the rest of the world.

Europe is in recession and the debt crisis is not going away any time soon. Growth remains tepid in both the US and Japan. The legacies of the global financial crisis of 2008, indebtedness and unemployment, continue to weigh heavily on growth.

Worse, the developed world is now confronting policy exhaustion. Not much can be done, short term, to kick-start growth in the West. There is no money left for fiscal stimulus. Indeed the opposite is under way – austerity. And with interest rates near zero, with trillions already tipped into the global money supply and billions given to banks, monetary policy is all but dead.

Even India, the other great hope for resources, is in trouble. Indian industrial production slumped in February to grow by just 4.1 per cent, way below the expected 6 per cent range. Worse, the January data was revised down to 1.1 per cent from the 6.8 per cent reported earlier.

But investors know all about these things. They are not pretty and do indicate an end to the resources boom, but they are not new and therefore not the makings of a major market move.

Known events never are.

Perhaps the greatest risk with the most significant shock value isn’t China’s or the world’s economic story, but the Chinese political story.

The bizarre Bo Xilai affair provides just a glimpse of a mighty conflict under way in Beijing as mandarins jostle to position themselves for the greatest change, due later this year, in Chinese leadership for decades.

Ideologies are clashing. Bo – the charismatic, populist, neo-Maoist Communist Party head of the massive city of Chongqing, who has been stripped of power while his wife Gu Kailai was charged with murder – represented the new left.

Bo was fighting organised crime and corruption in Chongqing and pushing a less aggressive capitalist model, strong state control and ownership and restricted democratic reforms; all this with Maoist-type songs and slogans, waving red flags and even female traffic wardens dressed in smart red coats.

Many in Beijing did not like this. For one, he was too popular. But they disagreed with the neo-Maoist position. An opposing ideology, most publicly espoused by China’s current Prime Minister,
Wen Jiabao
, favoured increasing economic and even political liberalisation.